Rise of wages, rupee to cap growth

Rosemary Arackaparambil

MUMBAI: Indian software firms will report strong third-quarter annual earnings growth as Western companies continue to outsource low-cost jobs, but wage hikes and a strong rupee could cap growth on the previous quarter.

While there is still confidence in underlying business growth, analysts expect software shares, up sharply in the past three months, to reverse if guidance for the year is not raised.

Mid-sized MphasiS BFL Ltd. kicks off the earnings season on Tuesday, followed by market leader Infosys Technologies Ltd. on Wednesday, Tata Consultancy Services Ltd. on Thursday and Wipro Ltd. next week.

According to median estimates from a Reuters poll of 14 brokerages, Infosys will report that December quarter net profit rose 46 percent on the year and seven percent on the September quarter, while Wipro's net profit will rise 55 percent on the year and 7.3 percent on the quarter.

"The rupee appreciation will play spoilsport for an otherwise good December quarter of strong sequential volume growth," Kotak Securities said in a research report.

The rupee rose 5.9 percent in the three months to December.

Indian software firms, which earn most of their revenues from overseas, gain when the rupee falls. Broker CLSA reckons a one percent rupee appreciation shaves 30-35 basis points off their operating margins. But the impact of the rupee's strength would vary depending on companies' hedging strategies, analysts said.

Wipro and Satyam Computers Ltd. could also feel the impact of salary hikes in October, analysts said.

Kotak said Western companies had accelerated shifting jobs to the region as senior executives, not just chief technology officers, took an active interest.

"We expect this to continue, implying continuity of volume growth," the report said.

Outsourcing to countries such as India, which are rich in low-cost, skilled labour, has surged in recent years. But the money in third-party offshoring has attracted multinational service providers such as IBM, Accenture and EDS, who provide stiff competition to homegrown firms.

Companies have reported stable billing rates this year and, with the postive business flow, most raised their guidance for the full year to March at their quarterly results in October.

"I think companies will be able to meet their guidance for the year. People will be looking for whether guidance can be raised still (further)," said Gurunath Mudlapur, head of research at Khandwala Securities.

"Stocks have run up quite a bit, so from a valuation perspective, there could be a slight underperformance in the short-term, but the business will continue to grow," he said.

The Bombay Stock Exchange Information Technology index has gained 16 percent since the end of September.

India's top three software firms' forward price-earnings ratios for the year to March 2006 range between 22 and 24, compared with IBM and Accenture at 17 times.